The demand for USD as a funding currency (dollar shortage) and lack of growth visibility even before COVID-19 is negative for EUR

Europe is now the worst affected COVID-19 pandemic zone; EURUSD lost over 3% despite the Fed’s unlimited QQE

EU fiscally surplus country such as Germany is not ready for a common EU COVID-19 bond as it will be equivalent to provide a sovereign guarantee to other EU27 states (like Italy, Spain)

Europe is trying to reopen gradually after Easter (12th Apr), but that may not be possible till May 1st week

EURUSD closed around 1.0858 slips almost -0.30% in the U.S. session Friday on the suspense of a mega EU stimulus package as Eurozone Finance Ministers failed to agree on a common relief package for the economy to avoid a deeper corona recession. After an unprecedented whole-night (16 hrs.) virtual meeting Tuesday, the Eurogroup Chairman Centeno confirmed that he was suspending the marathon discussions until Thursday. The market is expecting at least €1T EU fiscal stimulus backed by ESM (European Stability Mechanism).

Eurozone southern countries ( such as Spain and Italy) are reportedly pushing for loose conditions for accessing credit from the (ESM), but a number of northern countries (Germany, Netherlands) have denied the requests. And sharp differences between Italy and Netherlands about the terms & conditions attached to any common Eurozone credit (bond) for the EU27 states may have halted the discussions.

Germany, Netherlands and certain other Northern Eurozone nations have some reservations about the issuance of common COVID-19 Eurobonds, as it would be equivalent to provide a sovereign guarantee to other nations. Additionally, Eurozone Finance ministers are attempting to create a system of state-backed wages (like the U.S.) to compensate workers for reduced hours as a way to keep them on job roles.

On Tuesday, the Dutch Finance Minister Hoekstra tweeted:The Netherlands was and remains against the idea of Eurobonds, we think this will create more problems than solutions for the EU. We would have to guarantee the debts of other countries which isn’t reasonable. The majority of the Eurogroup shares this view and does not support Eurobonds.

On Wednesday, the ECB President Christine Lagarde again urged European governments to step up and deliver a strong fiscal response (stimulus) to prevent a widespread long-lasting corona recession. Lagarde described the present corona lockdown scenario as putting ‘the economy on hold’ and wrote in an op-ed: The ECB is playing its part

Around the world, public authorities are mobilizing to fight the coronavirus. COVID-19 represents a new form of economic shock that cannot be tackled using the textbooks of the past. We need policies targeted at those most exposed to this crisis.

Today, these are the firms and families facing a steep loss of income and rising anxiety about the future. The European Central Bank’s policies are designed precisely to reach these people. Within our mandate, we have calibrated our measures so that liquidity gets through to the citizens and sectors most in need of support.

To understand how our measures are working, we need to identify why this crisis is special. Its origins are unlike those of a financial crisis or a conventional recession. The sharp drop-off in economic activity is a consequence of the necessary decision to ask people to stay at home. This creates an imperative to prevent viable firms from folding and employees from losing their jobs because of a temporary crisis for which they bear no blame.

Employees are more at risk today than at any time since the 1930s. For example, in 2009 new unemployment claims in the United States peaked at 665,000 in one week. The last two weeks have seen such claims rise first to 3.3 million and then to 6.6 million. While in Europe unemployment is typically more sluggish and less volatile, we already see troubling signs: the Purchasing Managers’ Index for employment registered a record fall in March.

To avoid lasting damage, we need to “put the economy on hold”, keeping it as close as possible to its pre-outbreak state.Different tools can be used to achieve this end. One is to introduce government schemes that support employment in the short run. Another is to mobilize the banking system to provide firms with working capital to keep paying staff and bills. As the euro area is a bank-based economy, facilitating the flow of credit helps to get liquidity quickly into all the cracks of the economy.

Governments and central banks are taking complementary actions to put banks in a position to do this.Governments are providing loan guarantees that reduce banks’ credit risk: around 16 percent of GDP has already been committed to such schemes in the euro area.And the ECB is providing enough liquidity to remove banks’ liquidity risk while ensuring that financing conditions remain supportive for the wider economy.

We have introduced two types of measures to achieve these goals.

First, targeted measures on a massive scale to make sure that liquidity gets through to those that need it the most. Our new targeted lending facility provides up to around €3 trillion in liquidity to banks at a negative rate, which can be as low as -0.75 percent, the lowest rate we have ever offered. We know from past experience that such measures can be powerful. We estimate that the two previous rounds of such targeted operations encouraged banks to lend about €125 billion more than they would have done if these facilities had not been in place.

To ensure that banks make full use of this new facility, we have also introduced a targeted collateral easing package, with a special focus on smaller businesses, the self-employed and private individuals. Loans to companies and the self-employed which benefit from coronavirus-related guarantee schemes may be accepted by Eurosystem national central banks as collateral in our lending operations, including smaller loans.

These measures will encourage banks to extend loans to micro-firms and sole traders - who typically have less access to credit - and refinance them by borrowing from us for up to three years at negative interest rates. In the euro area, around 22 million people are self-employed, representing 14 percent of total employment. So these measures will facilitate access to credit for a larger part of our workforce.

Second, we are buying public and private sector bonds in large volumes to ensure that all sectors of the economy can benefit from easy financing conditions. Our pandemic emergency purchase program, together with our other asset-buying programs, allows us to purchase more than €1 trillion of bonds until the end of this year. And, within this program, we can flexibly focus our purchases across asset classes and among jurisdictions. We have also extended our asset purchases to commercial paper, which is an important source of liquidity for firms. This provides them with additional support to manage their day-to-day cash flows and avoid unnecessary layoffs.

Collectively, these actions show that we will not tolerate any pro-cyclical tightening of financing conditions amid one of the greatest macroeconomic cataclysms of modern times.But our response will be made more powerful if all policies reinforce each other. It is vital that the fiscal response to this crisis is undertaken with sufficient force in all parts of the euro area. Governments need to support each other so that they can together deploy the optimal policy response against a common shock for which none is responsible.

Full alignment of fiscal and monetary policies - and a level playing field against the virus - is the best way to protect our productive capacity and employment, enabling us to return to sustainable growth and inflation rates once the coronavirus outbreak passes. If not all countries are cured, the others will suffer. Solidarity is in fact self-interest. The ECB will continue playing its part by delivering our price stability mandate and serving the European people.

On late Wednesday, Lagarde said in an interview:

The longer the confinement, we have a more serious economic impact. Each month of lockdown costs 2%-3% of GDP--- Euro's value is stable---I would like to see some more inflation. ECB will ensure policy transmitted to all Eurozone. It’s necessary for governments to support each other to put in place optimal policies to counter shock from coronavirus.

Budgetary and monetary policies need to be aligned and equal conditions for all needed in response to coronavirus emergency. We are not quite there yet on a reconstruction fund and a collective reconstruction fund would be great. The fiscal tightening too fast would be a trap. The cancellation of debts from the crisis seems totally unthinkable to me. Vulnerable small companies must be helped. There can be other forms of European solidarity mutualized spending from a shared budget or a reconstruction fund.

On Thursday, the German Economy Minister Altmaier said:Can't see any damage from the German corona bonds stance. The German recovery is possible already in the second half.

On Thursday, Spain's PM Sanchez said:Coronavirus data is encouraging; we are close to the beginning of the decline. The fire starts to come under control.

On Thursday, the French Finance Minister Le Maire said:Agreement on EU crisis response is within reach.There is an agreement with Germany and other countries that we need an EU fund to finance economic recovery.

But France may extend virus-containment corona lockdown, while Trump said he could reopen the U.S. in phases, maybe ahead of schedule as the- stop spread virus (lockdown/social distancing) effort is working. The U.S. US NIH Dr. Fauci said:Right now expected deaths look less than thought earlier. But now it is time to intensify, not pull back on virus efforts. Beyond this week, we should see the beginning of a turnaround.

Conclusions:

Now talking about COVID-19 trajectory, as on 7th Apr, out of global cases of 1521809 coronaviruses, the U.S. contributes 435160 (28.50%), Europe 747042 (49.09%) and Asia-Pacific 261644 (17.19%). And in a horrible number of global deaths of 88653, the U.S. contributes 14797 (16.70%), Europe 61335 (69.19%) and Asia-Pacific 9652 (10.90%; including China).

Thus at a glance, Europe is the worst affected zone with almost 50% of global COVID-19 infections and 70% of tragic deaths followed by the U.S. (around 30% of total cases and 20% of deaths). Asia-Pacific contributes around 18% of total cases with 11% of total deaths; i.e. Europe is the most suffered COVID-19 zone and out of that Spain, Italy, Germany, France, and the U.K. are the top five countries, suffered most.

And more broadly, both sides of the Atlantic (Europe and America) are affected economically and socially most affected, while Asia–Pacific including China is much less affected. But in this age of globalization, most of the export-heavy Asian economies may not be able to recover fully unless and until Western countries (Europe and America) recovers at least to 50% of pre-COVID19 levels.

In any way, no pandemic runs forever; it has to stop at a certain point until the development of natural herd immunity. The U.S./EU/global economy will gradually bounce back after containment of COVID-19. But it would not like ‘V’ shape sharp recovery, but rather ‘U’ shape gradual recovery. Even if COVID-19 fades from April-June onwards outside China due to the development of natural herd immunity, the corona scar will remain at least another one year, till an effective Vaccine does not evolve to prevent not only COVID-19 but also all such probable virus cases in the future.

The world may not be the same at least until the development of an effective corona vaccine, which is still 12-18 months away despite significant progress. Although, generally after a major pandemic, usually every 100 years cycle (1917 Spanish Flu), generally there is certain natural herd immunity in the community, after 2020 COVID-19 pandemic, the world is not in a position to take any undue risk. Thus the development of an effective COVID-19 vaccine is most vital.

Although the corona lockdown may be gradually withdrawn between April-June in different parts of the world including Europe as per their respective COVID-19 trajectory, the economy will take time to stabilize of its own feet till at least H1-2021 or earlier until general public (consumers) are vaccinated by the COVID-19 mRNA vaccine.

Till then consumers will be not confident for the fear of another similar pandemic, economic uncertainty and thus limit their discretionary spending to a great extent amid COVID-19 and economic uncertainty, even the economy is flushed with unlimited monetary and fiscal stimulus. The world will never be the same as it was (pre-COVID-19) because of widespread social and economic impact along with a general stigma against China (‘Wuhan Virus’).

But as the world can’t wait for another 12-18 months to vaccinate against COVID-19 and fully restarts the economy, Trump and other global policy actors may consider using present or some modified form of BCG vaccine as an ad-hoc measure to immunize against the coronavirus until the actual vaccine and therapies evolve.

Studies show that universal BCG vaccination policy in Asian countries as-well-as African and Russian (erstwhile the Soviet Union) may be helping corona and another similar viral pandemic while in the U.S. (no BCG vaccination policy) and EU (partial BCG vaccination policy stopped 20-30 years ago), the COVID-19 pandemic is horrible; i.e. universal BCG may be one of the game-changer factors along with strict lockdown measures, standard care and hot tropical weather factor.

Although China has universal BCG vaccination policy since 1950, the country has a gap of 10-years between 1966-76; this may be the actual reason beside strict enforcing of lockdown measures and standard medical/ICU care behind China’s ‘relatively’ lower number of COVID-19 casualties than that of U.S. or EU.

India has almost 99.50% of the BCG vaccination rate and has a consistent universal BCG vaccination policy since 1948. Data and various research suggest due to universal BCG vaccination and the advantage of hot tropical weather in a large part of the country India may be able to avoid a widespread COVID-19 pandemic despite poor healthcare, overcrowding, and unhygienic conditions. Data also suggests that due to universal BCG vaccination, overall deaths for the Indians and even NRIs are minimal despite global pandemic carnage.

This BCG-COVID19 correlation may be also true for other BRICS countries including China, Japan, South Korea, other Asian countries, Russia and African countries along with certain other factors like enforcing strict corona lockdown norms without worrying too much for the economic impact, unlike U.S. and Europe.

But that strategy of loose/partial lockdown may be also intended to spread COVID-19 in a community to a certain extent so that it will eventually develop natural herd immunity, usually after 60-90 days; although both Europe and the U.S. have already paid dearly in such effort with lack of adequate lockdown/social distancing measures from Phase-2 and lack of preparation for sufficient ICU medical care facilities.

Bottom line:

The ECB is actually out of weapons as it’s already in the lower bund and was not able to normalize its ultra-loose monetary policy after 2008 GFC (unlike Fed). The ECB has no space to cut rates further after keeping RR (DRR) at -0.50%. This is creating a deflation like a scenario and ‘Japanification’ of the Eurozone economy. Also, Banks and Financial institutions are not happy about ECB’s perpetual negative DRR, affecting their bottom line and also wage growth for the industry.

Thus ECB is providing liquidity at a very low/zero rate with attractive terms & conditions; i.e. it’s printing money (QE). But the problem is despite abundant liquidity in the system and low rate, European banks are not very enthusiastic to lend heavily to the already stressed borrowers in the absence of state (sovereign) guarantee and Lagarde made it quite clear in the presser that it’s up to the individual Eurozone states to provide such sovereign guarantee. And the story ends there as it’s now an issue of dual balance sheet problem for the Eurozone economy (stressed borrowers and banks).

The market is now concerned about another 2012-13 like the Eurozone debt crisis and in any way, the EUR is now a carry-trade currency (like Yen), not a growth currency (like USD). Subsequently, EURUSD tumbled and together with coronavirus crisis, we may see more serious and prolonged economic disruption in the Eurozone and EURUSD may eventually slip towards 1.05 rather than 1.15 despite the Fed’s unlimited QQE vs ECB’s limited bazooka.

Eurozone economy is much more dependent on Chinse and American consumption (export) rather than its own and thus coronavirus disruption may be more severe on it. As EU states are unwilling to employ a common huge fiscal stimulus unlike the U.S., EURUSD may be under stress even after the Fed’s ZRIP and QEternity. The corona dooms day crash in risk assets and resultant flow to the cash (USD); i.e. the attraction of USD amid US dollar shortage (as a funding as-well-as global reserve currency) and the appeal of COVID-19 safe-haven currency, USD is now and will be the king till at least the COVID-19 vaccine sees the day of the light.

Technically, whatever may be the narrative, EURUSD has to sustain above 1.09200 for a rebound to 1.09500*/1.09800-1.10200/1.10800* and may further rally to 1.11500*/1.11800-1.12200/1.13100 in the near term (under bullish case scenario).

On the flip side, sustaining below 1.09000-108900, EURUSD may fall to 1.08300/1.07600*-1.07000/1.06300* and further 1.06000/1.05500-1.04900*/1.03200 in the near term (under bear case scenario).

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